In the current low interest rate environment, Master Limited Partnerships have been the talk of the town for income investors. What's the reason? That would be their consistent, high-yielding dividend payments due to the fee-based structure that most operate under.
One area of tremendous growth lately has been the energy midstream in North America, which was due to the massive glut in oil and natural gas production. MLPs in this area have been growing their asset bases to capitalize on the infrastructure shortage, and several continue to view the sun rising along the horizon rather than setting.
At the beginning of 2013, I looked back at some earnings conference calls from the previous two months to gauge the direction in which some CEOs saw the market heading. The news was largely positive, which is good news for current MLP and midstream investors.
Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) is part of the Kinder Morgan family, which lays claim to the largest portfolio of pipeline assets in the business. Created as an MLP, it has returned 25% to investors on a compounded average annual basis for the past 15 years. Will that continue into 2013? Chairman and CEO Richard Kinder believes that utilizing rail, especially transporting crude to California, could be a near-term catalyst to help assure that it does; but pipelines certainly won't be taking a back seat over the long haul:
And, again, I think this emphasizes the fact that I believe, even after you get more connections done between Cushing and the Gulf Coast, I still believe there will be a very great interest in moving crude to California. So I think that's the biggest single opportunity. Crude by rail is important. And you've heard us talk before that I believe that is going to be part of producers' long-term portfolio because they're going to want some optionality...But I think the biggest opportunity of all, beyond the crude by rail, is the building of the new pipeline capacity.
Operating in the Gulf of Mexico (onshore and offshore), the Marcellus Shale, and the Rockies, Williams Partners (NYSE:WPZ) is one of the largest midstream MLPs in the game. These three markets all show great promise, and Frank Billings, a Senior Vice President with the company, believes that its network will allow natural gas liquids producers to access a variety of markets to accommodate the rising supply. These producers are having a tough time reaching chemical companies along the Gulf Coast, which have been living off of the recently cheap ethane and propane feedstocks. With around $95 billion in planned investment by these companies, Williams Partners and its peers could take this business and run with it.
Enbridge Energy Partners (NYSE:EEP) President and Principal Executive Officer Mark Maki feels similarly. He mentioned that rail has been growing in importance in the Bakken region to provide access to mid-continent refiners who are looking to process the cheaper crude. He believes that, eventually, pipeline infrastructure will catch up, and rail transportation will be relegated to markets like the U.S. West Coast, which are harder to reach by pipeline in an economical fashion.
Because so many upstream producers have been refocusing on oil production as a result of depressed natural gas prices, it came as no surprise when Magellan Midstream Partners' (NYSE:MMP) Chairman, President, and CEO, Mike Mears, highlighted that the majority of its capital expenditures would focus on expanding its crude oil infrastructure. However, this doesn't take away from its focus on the core of its business, which involves refined products transportation and terminalling.
While we see potential expansion opportunities in all of our business segments, crude oil pipeline and storage prospects still make up the vast majority of our potential organic project list, with about 80% of the current list of potential growth opportunities related to crude oil...because we do talk a lot about crude oil, because it is where a lot of our growth is. But it doesn't change the fact that we are still primarily a refined products transportation terminalling company. And we are still interested in growing that business where the opportunities are appropriate.
Lastly, I turned to a uniquely positioned company in this space in Buckeye Partners (NYSE:BPL), due to its international terminals in the Bahamas and Puerto Rico. Because of these access points, President and CEO Clark Smith believes the company will be able to capitalize on the growth in South American crude oil production. The company is also looking forward to the finalized expansion of the Panama Canal, which will allow ships with larger berths to cross, and hopefully utilize these terminals as crude holding and transfer facilities
We continue to see interest from major producers with interest at offshore South American crude production for logistics solutions that could require further expansion at the BORCO facility. All of this success is due to BORCO's advanced marine infrastructure and service capabilities which give us a competitive advantage over other marine terminals in the region.
With seemingly positive attitudes from all of these companies and their CEOs, it appears that the run of expansion and success that has been enjoyed might not be over just yet. One thing investors should be wary of, however, is companies that are breaching critical mass in certain geographies that would lead to diminishing returns based on excess available capacity. As of now, no regions appear to be in danger of that, especially the Bakken and Utica shales, which, by all accounts, are severely lacking in this respect.